ELLEN
BROWN: According to
a researcher in Germany, Margrit
Kennedy, who's a
professor there, she's collated data from businesses at all different stages of
production of a product, and she has found that 35% of everything we buy goes
to interest. So if we owned the banks, we would get that interest.

BONNIE
FAULKNER: I'm
Bonnie Faulkner. Today on Guns & Butter, Ellen Brown. Today's
show: "Restoring prosperity with Public Banking." Ellen Brown is an
attorney, researcher and author. She's the author of The Web of Debt: the Shocking Truth About Our Money System And How We Can
Break Free. She's the author of many books on
Natural Healing as well as numerous articles on the financial system. In Web of Debt,
her latest book, she analyzes the Federal Reserve and the money trust. I
caught up with Ellen Brown at a fund raiser for public banking in San Rafael,
California. She is on a speaking tour of the US and abroad.

Today we
discuss

·the Public
Banking Institute, which she heads

·public vs.
private banking

·two banking
models: sustainable and extractive

·the Federal
Reserve

·the "shadow
banking system"

·the Repo market

·the benefits of a
public banking system

·debt

·the money supply

·compound interest

·and "all
things money".

Ellen Brown, welcome!

ELLEN
BROWN: Oh, thanks Bonnie.

BONNIE
FAULKNER: It was
nice to finally meet you in person yesterday at your fund raiser in San Rafael.

ELLEN
BROWN: Oh,
likewise.

BONNIE
FAULKNER: You are
the chairman and president of the Public Banking Institute. Its website says, "Banking in the Public
Interest". What is the Public Banking Institute that you head, and what
are its goals?

ELLEN
BROWN: It's a 501(c)(3).
It's a non-profit think-tank sort of institute. We're all volunteers, we're just
promoting the idea that we'd all be better off if the states, counties, cities,
even the federal government owned its own bank, and borrowed from its own bank,
and used it the way banks are used: in other words, put the public's revenues
in the bank and created credit with that money. So, what banks do now, the
perks that Wall Street has that we aren't sharing in, is that Wall Street is
able to take our deposits, our government  state, local, and county and city
revenues are deposited generally in Wall Street banks, which then make loans
with that money, even though the money is still there on deposit in the bank 
that's the way banking works  so they're able to extend credit, charge
interest on those loans, but they're not using them right now for the benefit
of the local community. They tend to be using their ability to create credit
for derivatives and speculation, for buying up corporations that perhaps are
competing with our corporations, like, y'know, foreign corporations. Anyway,
they're not investing in our interest. So, a publicly owned bank would be
something on the model of the Bank of North Dakota, which is the only public bank that
we have right now, the only state-owned bank. It's been in existence since
1919. All the state's revenues, by law, go into the Bank of North Dakota, and
then the bank does what any bank does, it creates credit out of those deposits,
but the deposits are still there. So, they haven't spent the government's
money: they've lent it without spending it. It's still there when the
government needs to withdraw it.

What happens: if the depositor and the borrower come for their money at the
same time, what banks do is they borrow from other banks, at the Fed Funds
Rate, which is 0.25%, or they borrow from the money markets, or  there're many
different sources they can get funds, but  that's this whole  you hear the
term "liquidity": that's what they're talking about. It's "where
do they get their money if the deposits have already been withdrawn?" So
the bank is able to borrow very cheaply, and then turn around and lend that
money at 5% or 8% or 16% depending on what type of loan it is and then they get
that spread; they get that interest. So, if we own the bank, we can recapture
the interest and use it for public purposes. In North Dakota, they have a very
nice dividend that's returned to the state every year, and that  that allows
them to do all sorts of services we keep being told that we can't do, that we
have to tighten our belts, that we're in deficit, that we can't find the
money. But North Dakota has had a very nice surplus ever since 2008. In fact
they're in the enviable position of trying to decide what to do with the
money. Should they add more services? Should they cut taxes? I mean, they're
the only state in that position. Because, or one good reason is, because they
have their own credit machine that is creating credit for stimulating that
local economy.

BONNIE
FAULKNER: Well,
when you say that the Bank of North Dakota accepts deposits from the
government, and the government's money remains in the bank and then the bank
makes loans, these loans are just ledger entries, right?

ELLEN
BROWN: Right. That's
the way banks work, is that, it's double entry bookkeeping. So if you go to
the bank to take out a mortgage, which is a loan, let's say, say you want to
buy a house, then you will sign a mortgage, which is a negotiable instrument,
which is your promise to pay a sum of money over time, let's say it's $500,000.
So the bank will write that $500,000 on one side of its books and call it an
asset to itself because you have promised to pay that money over time with
interest. And then on the other side of their books, they'll write the same
$500,000 as a liability to themselves 'cause you're probably gonna turn around
and write a check to the seller of the house, and that check's gonna leave the
bank, and the bank's gonna have to come up with the money some how. So that
all nets out to zero from their point of view. What they've actually done is
create $500,000 that's gonna go out into the system. So then, where do they
get the money when you write your check and it has to clear? They would
normally draw from their own deposits, which would be, in the case of the Bank
of North Dakota would be the revenues of the state that have been deposited
there. But if they don't happen to have the deposits, their reserve account
will just go into deficit, and the Federal Reserve which is what clears all
these checks automatically just says that the reserve account is basically overdrawn
which means they have to get the money from somewhere else. So they can borrow
it from the deposits of other banks for example, and they have two weeks to
come up with this money, so some other bank will have the money, because they
just transferred the money over there. They just sent a $500,000 check into
some other bank. They can borrow that back. The money they just created, they
can borrow it back at 0.25%, the Fed Funds Rate, and meanwhile they've lent it
to you at 5% or something, so they get that nice spread. So if We the People
owned the bank, we would get that money. And it's not even just 5%. According
to a researcher in Germany, Margrit
Kennedy, who's a
professor there, she's collated data from businesses at all different stages of
production of a product, and she has found that 35% of everything we buy goes
to interest. So if we owned the banks, we would get that interest, and we
could recapture that money. So banking, instead of being this parasitic thing
that is just continually sucking profits out of the economy, that money could
be returned to the economy, and we would have a sustainable system.

BONNIE
FAULKNER: Now the
way you are describing banking it sounds like the loans are actually in some
sense or another based on deposits. Now I thought that the money was just
being created out of nothing, rather than being based on deposits. Is that
incorrect?

ELLEN
BROWN: Well, it is
created out of nothing in the first instance. I mean they  when they
do the double entry bookkeeping, they just write the money into their account.
They don't look to see what they've got in deposits, they don't look to see
what they've got in reserves. The loan officer is in a totally different
department from whoever's keeping track of the reserves. They just write  er,
they write it into your account, as  they write a number into your account.
So they've created a deposit account. So in that sense they've created money,
because  what they call money. It depends on how you define money. But if
you look at the M1, M2, M3  M2 is the circulating money supply. That includes
coins, dollar bills, and checkbook money. So anything that is a deposit
account is gonna be counted as money. So if they open a new deposit account,
they've just created money. But in order for that  I mean you might just
leave that money sitting there, and then nothing happens, and they  they don't
have to worry about deposits. But whenever you write a check on that account,
then the check has to clear through the Federal Reserve or some other clearing
house, and that means they have to draw from their pool of deposits in order to
clear the check. But if they don't have the deposits, not to worry: they will
get it somewhere else. There are many different places they can get it. And
if there are no other options, the Federal Reserve itself  well, they can draw
from the Federal Reserve's discount window at 0.75%, so it's still very cheap
compared to what they've just charged you.

BONNIE FAULKNER: Now is a public bank intended to be
used only by governments, state, county and local, and if so, how would the
government be using the public bank?

ELLEN
BROWN: Well, no,
the public bank is a bank that  actually, it partners with the local banks.
It's run by bankers, not politicians, and in fact, in North Dakota, we have one
retired North Dakota banker on our advisory board, and he  y'know, makes it
very clear, that, he says, "we are bankers; we're not development people",
and they avoid the politicians, y'know, they  make loans because they're
credit-worthy loans and not because some politician has leaned on them to  do
something.

BONNIE
FAULKNER: Well, no,
but I mean, how does the government use the bank? What is the government
requirement  what is a public bank? It's not a retail bank. It's not for
individuals, right?

[12:10]

ELLEN
BROWN: Well,
globally, 40% of banks globally are publically owned. And some of them are
retail banks. You can set it up any way you like. But the Bank of North
Dakota is more of a banker's bank. So it primarily partners with the local
banks, helps them with their reserve requirements, so, they guarantee the
loans, so that  that helps with their capital requirements, and they help with
liquidity. But they do make some individual loans. Like they'll lend at 1% to
startup farmers. They have certain policies that they pursue that are helpful
to their local community, which is largely farming and energy, so they make
low-interest loans for alternative energy, for example, and they make 1% loans
for startup farmers  directly. They used to make student loans directly, but
now student loans have been taken over by the federal government.

BONNIE
FAULKNER: Well,
what is the difference between private and public banking?

ELLEN
BROWN: A private
bank has private shareholders, and the profits go back to the shareholders, or
to the CEOs, you know. A private bank is out to make  [laughs] out to make
money, or, out to make profits, so they get bonuses, fees, commissions, for
churning loans. I mean, that is one problem, that their mandate is to serve
their shareholders, and of course their management is going to make as much
money as they can get away with as well. Whereas a public bank, its mandate is
to serve the public. It's staffed by basically, civil servants  I mean, they
don't make bonuses, fees, commissions  for making extra loans. So they're a
lot more conservative in who they'll lend to. And their mandate is to take the
long view and to do what's good for the local community, rather than  what
private banks  they're always taking the short view. I mean, the shareholders
want their money now. They're looking at their 3 month quarterly profits.

BONNIE
FAULKNER: Well, you
write that the Federal Reserve is composed of 12 branches, all of which are 100%
owned by the banks in their districts. Who owns the banks in their districts?

ELLEN
BROWN: Well, for
example, the largest Federal Reserve bank is the New York Fed. It's owned by
about 500 banks in their district, and they're obviously private. So all their
shareholders are private investors. And those are the people that are  they're
looking at the short term, quarterly profits and the bottom line. They're not
interested necessarily in whether even the bank survives, y'know, and they're 
certainly don't care particularly about whether the farmer that just got the
loan, how his business does. They just want to make their profits and get out
of there. Y'know, they'll foreclose if  whatever. It's all about money.

BONNIE
FAULKNER: [laughs]
That's the understatement of the century.

ELLEN
BROWN: [laughs]
Yeah. I guess that's what banking  banking's all about money anyway. But 
yeah. But it's whether the money serves the people or serves  serves private
interests.

ELLEN
BROWN: There're
two models of banking globally. I writing a book now on public banking, so I'm
looking at banking globally and historically. And there are two competing
models that go back actually for thousands of years. One is a cooperative
model, where the idea is to create credit for the community  support the
community, and the community shares in the profits. And the other is an
extractive model, where the bank is sort of in opposition to its customers and
to the rest of the  you know, the economy. And so, the idea is to keep
pulling  pulling money out. So whenever they reinvest the money it's their
private profits reinvested, so it's always  they're always taking more out than
they put in. That's the nature of compound interest.

And compound
interest grows exponentially, if you look at a graph of it, which is
unsustainable. So you have a sustainable model versus an extractive,
unsustainable model, which results in these periodic booms and busts, y'know.
In the Nineteenth Century we had banking crises on the average once every six
years, because of this model of puff up a lot of credit, get everybody locked
into debt and then you withdraw the credit  and then you [laughs] foreclose,
and take all the properties.

BONNIE
FAULKNER: Well, you
have said the banks lend only the principal and not the interest, which is the
nature of the debt system. What do you mean by this? And how does that
explain why debt grows exponentially?

ELLEN
BROWN: Again, there
are two models. When a bank creates money by double-entry bookkeeping, they'll
write you a loan for $500,000, but they want you to pay back $500,000 plus 5%
or whatever over 30 years. So if you look over the whole 30 years you will owe
back probably twice as much as you borrowed in the first place. California for
example has $155 billion in outstanding loans for the type that you do for
bonds and infrastructure, and of that $70 billion is interest. So that
interest is not created in the original loan, so that where are you going to
find that extra interest? Somebody somewhere has to take out another loan.
Which is basically a pyramid scheme. So there are only two alternatives.
Either you keep expanding the money supply, or, somebody has to go into
default. It's a game of musical chairs, and the odd man out is always not
gonna have enough money to pay off his loan, and he'll lose his property. So
the bank will issue a loan for ten, and take back eleven, issue a loan for
eleven, take back eleven and a half, &c. So if you look at a chart of that,
that  that does shoot up exponentially.

BONNIE
FAULKNER: And is
the bank charging interest on interest? Is that what the phrase "compound
interest" means?

ELLEN
BROWN: Right. And
you might think, "well, I'm not paying compound interest as long as I pay
my bill", but that's not actually true, because, the way they calculate
mortgages, compound interest is baked into the formula. And 80% of all loans
are mortgages. And so we actually have a huge compound interest thing going
on, even though we're not aware of it. It's pretty complicated to explain, but
the thing is, you're not  actually, let's say you're paying $2000 a month on
your mortgage. That's not actually enough to cover principal and interest for
that particular period. That's the way they calculate it. So it's  your
interest is actually growing as you go through this 30 year cycle.

BONNIE
FAULKNER: Yes, it's
interesting. I was talking to one of my credit card companies, and if the
amount due was not paid off in full, and the balance begins to accrue interest,
they're charging what they say the daily average balance, and that daily
average balance includes the accrued interest, so they're charging interest on
interest.

ELLEN
BROWN: Yeah. That
is compound interest. Yeah.

BONNIE
FAULKNER: Yeah. So
that's why, eventually  eventually the debt can't be paid, right?

ELLEN
BROWN: Right.
Well, if you look at a graph of an exponential curve, it eventually shoots skyward,
and that's the point  in nature the only things that show exponential growth
are things like parasites and cancer. And they ultimately run out of their
food source, and when that happens they hit the ceiling, and they drop straight
back down. That's the way the graph looks. So that's what happens with these
booms and busts.

BONNIE
FAULKNER: Well, how
does a public bank get around the exponential growth of compound interest?

ELLEN
BROWN: The original
model for a public bank, and it's still probably the best model, was the bank
of Pennsylvania in Benjamin Franklin's time. At that time the colonists had
figured out how to avoid having to borrow from the British bankers. They didn't
have their own money. They didn't have gold in the colonies, so the choices
were either to borrow from the British bankers at interest, and the British
bankers were just printing their own banknotes anyway, so it was still just
printed money, or the colonists devised this idea of printing their own money.
But some of the colonies just printed and printed and printed, and they tended
to hyperinflate the money supply. But in Pennsylvania, they got the idea,
among  in several other of the colonies, to form a bank.

So, they
would print enough money  say you printed $105. You're the issuer of the
money, so you're not just lending but you also issue the money. So you issue
$105, you lend $100, you spend $5 on your budget, and then there's $105 out
there in the economy, and it all comes back as principal and interest, $105.
Then you lend the $100 all over again, at 5% interest, spend the five  it all
comes back as principal and interest, and you can do that over and over, and it's
quite sustainable. So during the period that they did that, they pai d no
taxes, 'cause the interest was sufficient, plus, of course, they had the power
to create the money they needed, they had no government debt, and prices did
not inflate. So it was a totally sustainable, ideal system.

Then today,
of course, states do not have the power to actually print money, but they can
own a bank. So the bank then would lend, say, they lend  they lend $100, and
it gets paid back with $105, with interest, but the bank will then return those
profits to the government. The 5% either goes to the government, or it goes
into more loans for the economy, but anyway, eventually the profits get
returned to the government, which then spends them on the government budget, so
they go out into the economy. The difference is that a public bank will spend
its money on public services, so we get the benefit of that money. And that
will put people to work and stimulate the economy, &c., whereas, in the
extractive model, the profits are taken out, and they are reinvested, so it's
money  always money making money. They're always taking more out than they
put in. They're lending it in, and taking  that plus a percentage. I mean,
even if the money gets paid to the CEOs and so forth, they've got so much money
that they  they put it into money-making-money things that are  they're
always expecting their money to get bigger and bigger at the expense of the
economy.

BONNIE
FAULKNER: So what
you're saying then is in a public bank, the interest that the bank receives is
then reinvested for the public good rather than going to private use,
essentially.

ELLEN
BROWN: Right.
Right  it goes to the government, which then pays it in its budget, so it's
all those services that they tell us we can't afford  we can afford 'cause
we now have the interest. Banks collectively in 2011 collected $725 billion in
interest. And, we paid $454 billion in interest on the federal debt. So, if
the federal debt had been financed through the central bank, which then rebates
the profits to the government  the Federal Reserve actually does rebate its
profits, even though it's  the twelve Federal Reserve branches are privately
owned. They don't want to do it, but they were forced into it in the 1960s 
long story. So if we owned the central bank and funded the federal debt
through it, and if we owned the banks collectively  I know that's not gonna
happen any time soon  but just hypothetically, we could do exactly the same
thing Pennsylvania did. We could have $725 plus $454 is more than $1.1
trillion  and our income taxes were $1.1 trillion that year  we actually paid
more in interest in those two things  yeah, we paid that in interest. If we'd
gotten that back we wouldn't have had to pay income taxes.

BONNIE
FAULKNER: Well,
now, should Congress nationalize the Federal Reserve and the banks? You have
pointed out that the federal government nationalized General Motors and
American International Group, or AIG. You've also written that nationalization
is the same thing as bankruptcy and receivership. How would the Fed operate
differently if it were nationalized or part of the Treasury than how it
operates now?

ELLEN
BROWN: Well, right
now the Federal Reserve is completely independent from Congress. In fact, Alan
Greenspan said that once, in an interview. He said  I think the interviewer
asked something about what his relationship was with the president  I think it
was Clinton at the time, and he said, "Well, it doesn't really
matter" [laughs] he said, "because y'know, the president really has
no control over what the Federal Reserve does"  that they're an
independent entity. And according to the Federal Reserve Act, they're set up to
serve the banks. So, for example, with all this quantitative easing, the
money is going directly into banks' reserve accounts, and it never makes it
into the real economy. Now, if it were government owned and controlled, so
that the government were using it for the purposes of the public, they could do
what some central banks have done, historically, like the Commonwealth Bank of
Australia in the early part of the 19th Century, they could just directly
make loans  or even Roosevelt in the 1930s through the Reconstruction Finance
Corporation just made loans to everything in sight that was  productive
and that would put people back to work during a time when we were in a, y'know,
difficult economic times, when we were in a recession, and stimulated the
economy and got everything going again. And it paid off in the end. It
actually turned a profit for the government.

So this is
not handouts. It did not put us deeper in debt. We actually broke even and
made a little profit from the 1930s investments. And in Australia, they just
issued the money as credit, and did remarkable things. They built roadways and
seaways and funded the participation of the country in World War One, all
without borrowing internationally, without borrowing from the Bank of England.
The mistake of the governor of the Bank of Australia was that he then went to
England and bragged about it, and then passed away shortly thereafter, and they
changed the system after that.

BONNIE
FAULKNER: Well what
do you say to the frequent criticism that during the Great Depression the
United States government did not have the debt overhang that it now has, so
that the same solutions will not work. I've heard this claim made many times.

ELLEN
BROWN: You could 
if we owned the central bank, we could refinance the entire debt overhang. The
debt itself does not hurt anything. It's the interest that hurts. The debt is
actually our money supply. All of our money is debt based, except for dollar
bills, and  you know, a very small percentage of the money supply is actually
issued by the Federal Reserve as dollars or issued by the Treasury as coins.
And all of the rest is debt  bank debt. And the government's debt, the
federal debt, is basically the same size as the circulating money supply.

So if we had
no debt  that's what Galbraith said in the 30s, that we had to preserve the
debt, in order to have a money supply. But what grows exponentially, and what
is a problem, is the interest. If you look at a chart, the projected interest,
like up to 2080, it starts to turn up exponential, and that looks quite
dangerous. So if we refinanced that through our own central bank  in other
words the central bank could just  they're doing it anyway. They're like 
Quantitative Easing II was $600 billion, where they just bought up federal
securities. But let's say, hypothetically, they issued $15 trillion in
quantitative easing, and bought up the whole debt, and just paid off all the
creditors. Now  and rebated the interest to the government, so it would
basically be an interest-free  interest-free debt, would be an interest-free
money supply. It would just be money. In fact that's what the Japanese do.
They borrow from themselves, and that's why they have a debt to GDP ratio of
235%, and they're still way up there. I mean, they're a global leader
in many things  in all these electronics, and sophisticated  parts. I mean
they're actually doing very well. They're sort of  they keep a low profile
and pretend that they're heavily in debt, but they're in debt to their own
people. So we could do that as well.

Well, that's
very interesting, then. You say the real problem is interest accrued. How
would the government get rid of this interest?

ELLEN
BROWN: Well, that's
it. If they refinanced through their own central bank they get to keep the
interest. The interest is rebated. The Fed  see, even now, the Federal
Reserve rebates the interest to the government, even though you can argue about
whether it's actually publicly owned. But if it were nationalized in the sense
that Congress could actually control what the Federal Reserve did, then we
could eliminate the interest, and we could use that vehicle for creating credit
to direct it to what the economy needs. And there are many countries that do
this: China, India, Russia  the BRIC countries  Brazil, Russia, India and
China. Their banking sector is all dominated by publicly owned banks, and the
government uses those banks to direct the economy, and to support industry, and
they all escaped the banking crisis of 2008, they're growing like gangbusters 
they've grown by 92% in the last decade. We could do the same thing.

We tend to
say that [laughs] the Chinese are cheating as they support their industries
with the national credit, but instead of pointing fingers and saying that they're
competing unfairly with our banks, what we should do is have a look at what
they're doing and maybe consider copying some of that.

[31:41]

BONNIE
FAULKNER: Well,
right. You have said that 40% of banks worldwide are public, and like you've
just got done saying, they've grown by 92% in the last decade, specifically in
the BRIC countries, Brazil, Russia, India and China, and Latin America,
Argentina being a primary example. What's going on in Argentina?

ELLEN
BROWN: Well,
Argentina's a very interesting case, because their currency totally collapsed
in 2001, and then that's when the president was Kirchner, and he just told the
creditors to go away, said, "we don't have the money. Come back later
when we've got it", told the IMF to go away, and they just started issuing
their own money. They issued pesos at the federal level, and at the city/local
levels they issued  warrants, which were bonds. They were basically
government IOUs, but they accepted them in the payment of taxes, unlike what,
when California recently issued IOUs, they refused to accept them in the
payment of taxes, so that doesn't work as a currency. But as long as the
government will take it back. Like, they were giving us their IOUs but they
wouldn't take them back in payment. But in Argentina they did, and at the
local level they had a very large and successful community currency. So they
created their own money supply, and within four years they had remarkable
growth. I think it was something like 7% a year, contrary to all the critics
said, y'know, that this'll be a disaster, cutting off their source of
borrowing, internationally. In fact, they didn't need the international loans
at all. They created their own credit and got their economy going, and did
very well.

So right
now, then, Kirchner has passed away, and his wife is now president, and the
head of the central bank is also a woman, and they're just very quietly doing
their own thing, and they're not shaking a fist like Gaddhafi did, and just
took on the world, and, y'know, tried to mobilize the whole African continent
the way Gaddhafi did. They're just very quietly saying, y'know, "we've
seen your model, and we don't think it works very well, and we've decided to
try this other thing." So they're just issuing credit, and it's working
really well for the Argentineans. They do have price inflation, but the people
aren't worried about it, because they're also getting wage increases to match,
and the whole economy is just doing so well, they're just delighted to see
their economy thriving.

BONNIE
FAULKNER: And you've
said that China owns its banks, and that they can't sell off more than 25%,
that in China the banks are publicly controlled, and the credit mechanisms pays
for workers and materials to make a product, that they're not dependent on
private banks and speculation. Is this true? And is this why, you just got
through saying, the US says they're cheating?

ELLEN
BROWN: Well, y'know,
World Trade Organization rules say that you can't do certain things, and one of
them is to  y'know, they make loans to these businesses, then if the business
defaults, if the business can't pay, then it's just treated like a grant, in
other words they just write it off. So, technically, their banks have these
non-performing loans. But really what they're doing is just supporting their
industries, particularly their export industries, by supporting them with
credit. And yes, they do own  their big banks are publicly owned and publicly
controlled, and the government directs them what to do. But you know, I just
read recently that, even though they still have these 5-year plans, it's really
at the local level where all this productivity is happening. The local
governments control where the credit goes in their local economies, and they
really have a go-local model, much more than we did. They're starting at the
grass roots and going up, instead of starting at the top and going down like we
used to do.

BONNIE
FAULKNER: Well, let's
talk about QE3, or "quantitative easing to infinity" as they call it
 $40 billion per month, they're buying mortgage-backed securities, toxic
assets, right? You have said that QE3, or "quantitative easing to
infinity" is no more than an asset swap on balance sheets. Is that what
you mean, because they're buying up these toxic assets?

[36:25]

ELLEN
BROWN: Well, what
happens when they  the Fed issues credit ba  y'know, it issues accounting
entry money which it then buys the assets from the reserve account of the
bank. So, before, the bank had dollars, and then it used the dollars to buy
these assets, and now the Fed has swapped them out, so now the bank has dollars
again. So the bank doesn't really have any more than it had before. The
mortgage-backed securities have just been turned back into dollars. So this
whole exercise of QE3 is not helping the homeowners. It  supposedly it was to
lower interest rates. Interest rates are already at 3½%, which is already
ridiculously low, so that's not the  really the hold-up in the housing
market. So then various commentators were wondering about what the real point
of QE3 was, and that the argument that looked most logical to me was Catherine
Austin Fitts said that  she used to work for HUD, and so she's kind of an
insider, and she said the Chinese and the pension funds, and y'know, some big
important investors had bought most of these mortgage-backed securities, I
think it's Fannie and Freddie, these securities are backed by the government
until the year 2012. But when that guarantee runs out, there's not gonna be
any market for these things. And so the Fed is basically creating a market for
them. 'Cause otherwise the Chinese could be very upset. Y'know, the Chinese
are actually in a position to  I mean, they could be a military opponent if we
aggravated them too much. We made representation that these were AAA
investments. And our own pension funds and pensioners are not gonna be too
happy if all their money collapses. So that was the idea, to save the investors,
who are big important investors, not just little  little people. But it is
not helping the real economy. I think quantitative easing is a good idea, and
they need to get more money out there. The money supply has shrunk by $4
trillion since 2008, if you count the shadow banking system, the M3, which is
pretty complicated, but there's not as much money competing for goods and
services as there used to be, and therefore there's not the demand, and
therefore businesses don't have money coming in, so they can't hire, and that
causes unemployment, &c. So we need to get more money into the economy,
and quantitative easing isn't doing it, although apparently it is serving some
purpose that is useful in its way.

BONNIE
FAULKNER: Well,
now, when the government buys up these mortgage-backed securities, many of
these assets that are not worth much, is it the taxpayers, then that are buying
this stuff up?

ELLEN
BROWN: No, it's the
 the Federal Reserve creates this money on its books. It's creating money,
and getting back the mortgage-backed securities, so it's monetizing the
mortgage-backed securities, basically. It's turning these assets that were
interest bearing into dollars, which are not interest bearing. In other words,
it's an asset swap. That's what the Fed does. It's not creating anything. It's
just swapping non-interest-bearing notes, which are called dollars, for
interest-bearing notes, which are called securities.

BONNIE
FAULKNER: Right,
but does QE3 then devalue the dollar, eventually? Will it have that effect?

ELLEN
BROWN: No. That's what
everybody thinks  that it's hyperinflating the money supply, that it's going
out into the economy, competing for goods and services, and therefore raising
prices. But it's not. It's not making it into the real economy. I think it
would be good if it did. We need more money out in the real economy. People
point to oil, food, gold and silver, and say that prices are going up  those
are the obvious ones. But they're going up for a different reason. It's not
because there's too much money in the money supply. And you can tell that by
looking at housing. If there were too much money in the money supply, housing
would be going up as well, and it's still way low, even though it's creeping
up. The reason that commodities are going up is that the speculators, or the
investors  y'know, you and me, all the people that have money invested
somewhere  the hot money, the money that moves from one investment to another,
it used to be in real estate, and then suddenly real estate was a bad
investment, and everybody got out of it. The mortgage-backed securities that
were supposedly AAA weren't AAA, and housing itself is declining, and now there's
really no other safe place to park your money. You can't even put it in
government bonds anymore, because they're paying so little, which is all done
to save the banks. So the only thing that seems to be going up these days is
commodities, and so everybody's money is moving into commodities, the funds are
in commodities, pension funds, the big institutional investors, they now have
big investments in commodities including food, and oil.

BONNIE
FAULKNER: So that's
interesting. So then I guess you're saying the speculative money has gone into
commodities, and that's what's driving the price up, not a falling dollar, is
what you're saying.

ELLEN
BROWN: Right, and
not the fact that there's too much money competing for too few goods. If there
were, they'd be putting people back to work making more goods. That's what
happens when there's an increase in demand. The first thing that happens is
they put people back to work, and it doesn't drive up prices until you have
full employment, and we're nowhere near full employment. That happened in
Argentina, when they finally hit full employment prices did start to rise, and
at that point Kirchner put price controls on the goods, but another thing you
can do is just, y'know, pull the money back in in some other ways, like y'know,
taxes, or fees  on  things. I think that  actually think the government
should be allowed to make some money in all those things that we invest in. We
should be able to get a return on that, and that would be a way to get money
back to the government and keep it circulating, and make  make the whole
system sustainable.

[42:59]

BONNIE
FAULKNER: Well,
now, Bernanke has said, he's gonna do monetary easing to the tune of $40
billion per month until employment improves. But if none of this money
is going toward infrastructure or employing people, it's not going to have that
effect, is it?

ELLEN
BROWN: Right. He'll
just keep doing it until he buys up all the mortgage-backed securities,
probably, which, again, probably appears to be to save the Chinese and the
pensioners. The big investors.

Now you've
written that the money supply is still short by $3.9 trillion from where it was
in 2008, before the banking crisis hit, so that the Fed has plenty of room to
expand the money supply. And you've stated that. And I'm kind of surprised to
read that, because with the QE3 of course so many people are saying that there's
too much money out there.

ELLEN
BROWN: Yeah, well
that's the point. The QE3 did not make it into the real circulating money
supply. And what is short is in the shadow banking system, which is so obscure
that most people haven't even heard of it. They didn't bother to regulate it
in Dodd-Frank. It's only regulating the conventional banking system. But the
shadow banking system is actually larger than the conventional banking system,
and the conventional system is dependent on the shadow banking system. It's
not something you can get rid of. So what it is  it's pretty complicated, but
it's an added source of liquidity for the regular banking system, so it's the
repo market, where large institutional investors have more than $250,000 to
invest. It could be like pension funds, or maybe it could be ordinary mutual
funds, hedge funds, sovereign wealth funds, all those things. They have huge
amounts of money. Say, a mutual fund: it sells a stock, and then, for the time
between when they sell the stock, then they buy another stock, they want to
park their money somewhere, and they want to make a little interest on it, so
they put it in the repo market, which is like this huge pawn shop, where they
deliver their money, and the pawn shop delivers some security in return. The
security is these mortage-backed securities, which is our real estate which has
been chopped up into little pieces and sold off to investors. So that's the
shadow banking system, which is actually creating money in the same way that
the regular banking system creates money. I mean they're creating money as
credit, and virtually all money today is credit, created by banks or these
other financial institutions, non-banks. And that shadow banking system is the
thing that's collapsed in 2008. There was a run on the shadow banks, on the
money markets, and the money markets are a source of liquidity for the
conventional banks. So credit froze across the board, and that was the whole
problem. So that money is no longer out there competing in the market, playing
in the market, being a part of the whole credit system. The credit system is
huge, the amount of money that is lent  well, I saw, I saw an analysis by a
man who is actually a gold bug, but he was saying, you couldn't have a 100%
gold system, because you wouldn't have near enough gold to borrow to meet all
the demands at all the stages of production of a product, a product that they
borrow at each stage of production. You have to pay your workers and materials
before you have a product to sell, and before you get paid by the end
purchaser, like 90 days max. So for that whole period, all these producers
have to fund their business on credit. So you could add up the all those
producers of a single product, comes out to many times what the actual price of
the product is. And that's all credit that flies back and forth every day.
Has to be millions of checks that are just flying back and forth, and you need
to get that liquidity. You need to get that credit, and that largely comes
from the shadow banking system.

BONNIE
FAULKNER: Now when
you use the term "shadow banking system" you're talking about this
credit that  you're talking about, what? Money market funds, or talking about
derivatives?

ELLEN
BROWN: Uh, the
derivatives, the derivatives trade, actually, allegedly come to $1½
quadrillion, I mean it's this huge, huge, impossible sum, and the shadow
banking system is only  it was $20 trillion at its height; it's now dropped to
$16 trillion I think. So it's  it obviously doesn't include derivatives in
that sense. But I've seen this, somehow the derivative  maybe it's the pra . The
derivatives are connected to the shadow banking system somehow. I'm just not
sure how. Oh, well, the derivatives, for one thing, are the insurance that
protects all these mortgage-backed securities supposedly. But we know that
they really don't. You know, like the credit default swaps, which are
basically bets on whether or not these things will default. So you have investors
on both sides. If you buy the insurance, you're betting that the thing will
default. If you're selling the insurance, you're betting that the thing won't
default. Somebody has to come in and pay the other party depending on how the
bet comes out.

BONNIE
FAULKNER: Right.
The credit default swaps. So just to be clear about the shadow banking system,
you're talking about what? All of this overnight credit that's flying around?

ELLEN BROWN: Right. The shadow banking system is not part of the . The
conventional banking system is depository. Y'know, it's based on deposits, and
it's where banks create money in the form of deposits. So the shadow banking
system also creates credit, but it's not bank credit, it's non-bank credit.
But it's the same thing. It's still credit that's out there, competing in the
money supply. It used to be counted in M3, but now they don't report M3. But
it's still out there. The whole system's still there, but they can't figure
how to count it. And so  I mean, that was their reason for not reporting it,
although other suspicious commentators say that it's because they didn't want
us to see all this shadow business that was going on, how big it was, and how
fragile, because there's nothing protecting it. There's no FDIC insurance,
there's no deposit requirement, no capital requirement. But it evolved for a
good reason. I mean, you need to have a flexible credit system like that.
Here's, here's what I  if I can suggest, my vision for an ultimate credit
system: what I think the problem is, it's all private, and therefore nobody
would trust the bank, unless the bank has the money. At some point the
bank has to come up with the money. But if you had a public system, you don't
need to be backing it up with mortgage-backed securities, you know, by real
estate, or gold, or whatever. You could just have a credit system. In other words,
what you're really turning into money, is the borrower's promise to pay.
You're monetizing the future ability of the borrower to pay  to pay back this
loan. So the borrower goes to the bank, the public bank, and says, "this
is me, this is what I plan to do with the money, I'm gonna build  whatever,
this is how I'll pay it back. You know how to find me. You've got the court
system. You can attach me. This is what I've got in the way of real estate,
&c." So you've got this whole public system, including the courts and
the sheriff. And so, everybody trusts it, because you know how to collect.
And then you're turning that promise to pay into money. And that's what money
is. That's what it was among the colonists originally. It was just little
receipts showing that the goods and services had been delivered to the
community, and that the community owed that sum. So it seems to me that the
whole system is totally messed up. And the reason is that we feel we have to
back  y'know, we feel that money is a commodity. That's what I want to say.
We think that money is a thing, and that you have to  "get the
thing" somewhere. You have to dig it out of the ground, or you have to
get it from somebody else. But that's not really what money is. All money is
merely legal agreements. It's merely credit, turning your promise to pay into
credits that can be spent for other credits in the system.

BONNIE FAULKNER: Right. In other words, money is created by law.

ELLEN BROWN: Yeah. Exactly.

BONNIE FAULKNER: Now, is it true that twenty states have introduce bills for
public banks?

ELLEN BROWN: Right. Twenty states have put forth bills either to form a
bank, or to do feasibility studies. Colorado has an initiative to form a
state-owned bank.

BONNIE FAULKNER: And what about postal banks? In France, you can bank at
the Post Office. How does that work?

ELLEN BROWN: Uh, very well. In Japan  actually the largest depository
bank in the world is the Japan Post Bank. And that's where the Japanese tend to
save. And so they get a little interest on it, on their savings. I mean you
can go and get your stamps, and make your deposits, and get your checks in the
same place. So you already have all these post offices around the country, and
if you turn them into a bank as well, where people can save money and write
checks, it works out very conveniently. And then the Japan Post Bank buys the
Japanese Federal Debt, so the people themselves are getting interest on their
own federal debt. That's been going for over  well over a hundred years. But
in New Zealand, they've just recently set up a postal bank, which  they did it
because their big banks were Australian, they were foreign, and they were 
they were just going after the bottom line, and there were many places in that
country where it just wasn't financially profitable to have a branch, and so
they were closing all these branches. So the New Zealanders were quite upset
with this whole system. So they used their post offices to set up a public banking
system, where everybody could have access to a bank and it was wildly
successful, in spite of the critics who said it wouldn't work, because the
people just moved their money in droves into this public bank, because they
were much happier with it than the foreign banks.

BONNIE FAULKNER: What about student debt? How dangerous is this debt? I've
heard it said that student debt is the new debt bubble.

[54:08]

ELLEN BROWN: It is. It's over a trillion dollars now, and there's no
way it can be paid off. I mean, not all of it. So it's very like the
sub-prime loans. It's  y'know, shaky debt. The students themselves have had
 all the protections that debtors are supposed to have have been taken away
from the students. They can't file bankruptcy. Their Social Security can be
tapped up, in order to pay the student debt. I mean, your Social Security is
there, for your security in your old age. And if you can cut into that for
your  for your student debt, it's quite a desperate situation for some people.
Like UCLA, where I went to Law School, is now $35,000 a year for tuition for an
in-state student. You can get out of school with like $200,000 in debt. And
if you can't get a job, there's no way you can pay that off. Then they're
allowed to do things like, increase the interest rate. They just make it a lot
more difficult for you to pay it off.

BONNIE FAULKNER: How does public banking benefit the public?

ELLEN BROWN: Well, first, we get the profits from the interest on our
own government money, which currently is deposited in Wall Street banks, and
they get the interest. And the interest is a lot more than we think it is:
it's 35% of everything we buy goes to interest. Second of all, the public can
direct  or, the government can direct where the credit goes. Right now, Wall
Street particularly, which has, like, five banks have over half the banking
assets of the whole country, they can direct credit to their own purposes.
They've sort of lost interest in investing locally. They're more in  now
they're into interest rate swaps and other forms of derivatives and speculating
for their own account, &c. And  so that's two  oh, and the state bank
partners with the local banks, so it strengthens the local banks' ability to
lend to the local community, which they're having a lot of trouble with right
now. The local banks are being bought up by the big banks, they can't meet the
capital requirements, these heightened capital requirements, and they've got
regulators, apparently, all over them, so they're afraid to lend. It helps
with all that.

BONNIE FAULKNER: Ellen Brown  thank you very much.

ELLEN BROWN: Thank you.

BONNIE FAULKNER: I've been speaking with Ellen Brown. Today's show has
been: "Restoring prosperity with Public Banking." Ellen Brown is an
attorney, researcher and author. She is the author of The Web of Debt: the Shocking Truth About Our Money System And How We Can
Break Free. She's the author of many books on
Natural Healing as well as numerous articles on the financial system. She
developed an interest in the developing world and its problems while living
abroad for eleven years in Kenya, Honduras, Guatemala, and Nicaragua. She is
currently working on a new book: The Buck Starts Here: Creating Prosperity
With Publicly Owned Banks, due out in January 2013. Visit the Public
Banking Institute's website at www.publicbankinginstitute.org, and Ellen Brown's website at www.webofdebt.com.